Enterprise Inns has revealed it has converted 22 pubs to convenience stores and will continue to look at this operating model as an alternative to disposals.

Speaking to M&C Report following publication of results showing a 1.4% rise in like-for-like net income for the full year, chief executive Simon Townsend said: “In the past we have often disposed of properties which we didn’t believe had a sustainable future and someone else has converted them into a convenience store.

“Now that we are no longer relying on disposals to repay debt we are able to convert those sites ourselves and we currently have 22 convenience stores. They are being run on commercial leases.”

Townsend stressed there was no target for growth of this model and said they would look “on an individual basis” at future conversions.

Enterprise’s results showed the company currently operates 159 commercial properties – of which 137 are free-of-tie pubs.

Enterprise reported disposal income of £73m for 2014, down from £150m last year. The average value of sites disposed also dropped – from £350,000 in 2013 to £317,000 this year. The company said this reflected the fact that the majority of assets being sold were underperforming where returns do not justify their retention. It said the disposal programme is expected to reduce in size again next year with proceeds for the year to 30 September 2015 expected to be in the region of £60m of which up to £40m is expected from the Unique estate.

A re-evaluation of the pub estate resulted in the value of Enterprise’s current estate being written down by £75m (2013: £139 million), a 1.9% (2013: 3.4%) reduction to £3.8bn with £42m charged to the income statement and £33m reflected in the revaluation reserve. Enterprise said it expected sustained growth in lfl net income to be reflected in valuation stability and, ultimately, growth.

Townsend said Enterprise was enjoying success under several different operating models, including its fledgling managed estate, which currently stands at nine but will grow to 14 by the New Year.

He said: “This is a trial and it is all about what learnings we can take from the model that can benefit the wider estate. It gives us the flexibility to improve the profitability of sites that are currently under-performing. It may be that when they are back to a level that we are happy with that they are brought back into the leased and tenanted estate.

“We have three retail models within our managed operation – a community hub; a young family orientated proposition and premium dinking. It is entirely possible that we elements of these models or learnings from them in other parts of the estate.”

Townsend said the partnership with Pieminister at three of its pubs had performed well.

On whether the partnership could go further, Townsend said: “It is clear that any food offering has to be of a high quality and if that can be operated on a relatively simple format then that is a great advantage.”

Townsend said the Beacon model had continued to perform well, with lfl net income up 7% across the 183-strong estate.

He said supporting publicans would continue to be a key focus in the coming years and highlighted the success of the company’s online ordering service, its high-speed WiFi service and its reduced price Sky and BT Sport packages. Incidences of publican failure we down 16% this year to 486 and Townsend said further improvement was being targeted.

On future trading, Townsend said he remained cautiously optimistic that consumer confidence was returning and said sales for the first part of FY2015 had been encouraging.

Analyst reaction

Douglas Jack at Numis said: “Full year PBT was flat, at £121m (we forecast £121m; consensus £120m) as a consequence of LFL net income rising 1.4% and 4.6% net debt reduction offsetting the EBITDA impact of 230 pub disposals. Supported by recent growth in LFL net income, we are holding our forecasts, which are reliant on MPs voting down the proposed market rent option today.

“LFL net income rose 1.4% in 2014, aided by: easy comps of -2.9%, the FIFA World Cup and favourable early summer weather. We estimate LFL net income rose 0.5% in Q4 (against tougher comps of 0.6%), implying an improving two-year LFL trend. LFL net income is benefiting from increasing business support, helping the number of business failures to fall by another 16% (to an estimated 486 pa vs 972 in 2009), and growth capex rising to 41% from 32% as a proportion of total capex.

“Enterprise’s is gradually having more involvement in the operation of its pubs. Its 5,348 pub estate now includes nine managed pubs and 183 Beacon managed tenancies. At the opposite extreme, there are 159 free-of-tie commercial property leases.

“Today’s, MPs vote on a “market rent only option” for tied tenants, threatening to undermine the beer tie to which almost half of Enterprise’s profits relate. If voted for, this could lead to a material decline in support and capex, resulting in 4,600-6,400 pub market closures (source: London Economics report), to which Enterprise would not be immune.

“We are holding our forecasts, which anticipate minimal LFL net income growth in 2015E. If one were to invest in a tenanted/leased pub company, we would choose Punch Taverns over Enterprise Inns. Both companies are making operational progress, but Punch offers lower gearing (7.2x vs 7.7x net debt/EBITDA) and a lower valuation (8.9x vs 10.1x EV/EBITDA) for 2015E.”

Geof Collyer at Deutsche Bank (DBE) said: “Headline results were slightly better than DBE despite fewer pubs trading and an extra £4m of central overhead (equivalent to >3% of reported PBT). EBITDA was £0.8m lower than DBE, but was more than offset by £3.8m lower net interest vs. DBE. Having been +1.3% at the 44wk stage, lfl net income was positive +0.5% in Q1’14 (DBE +0.5%), making +1.4% for FY’14.

“The current trading statement – which talks about sustainable net income growth – shows that the lfl net income growth has continued into Q1’15; we interpret this as the same rate as Q4’14, so +0.5% (vs. a comp of +0.5%). We are forecasting +0.8% lfl net income growth in FY’15 and a return to absolute EBITDA growth in H2’15. With positive news on current trading, and EPS growth forecast for FY’15, the shares should rally.

“Our 205p price target is 10x FY’15E P/E (the long term average since IPO in Nov. 1995, and compares to 6.4x today. BUY.

“Business failures fell again, by -16%. This was 3% better than DBE and represented 8.6% of the FY opening estate. It was also 50% fewer pubs than the FY’09 peak failure level. This remains the clearest sign for us of the continuing business turnaround.

“Average pubs trading were -4.9%, but average sales were +4.0% and average EBITDA/pub was +1.1%. Pubs in Greater London (14% of the estate) saw lfl net income +4.4%, with 90% of the total estate generating +3.1%, implying that the bottom 10% were -14%.

“Disposals were in line at £73m, with 230 bottom end pubs sold at an average/pub of £317k. The group has taken a 1.9% asset write-down (small beer in the context of the >50% discount to NAV that the group is trading on). However, helped by the disposals, average values for the retained estate are +1.0%, in line with average EBITDA growth.”